Regulatory Alerts2008-11-03 | OpR Expert Group recommendation on the definition of operational risk (of 05.03.2008)OpR Expert Group Recommendation on the Definition of Operational Risk
The OpR Expert Group recommends a standardized definition of operational risk under Section 269 of the Solvency Ordinance to guide national implementation of Basel and Brussels rules. The definition encompasses losses from inadequate internal processes, personnel, systems, or external events, explicitly including legal risk while excluding strategic and reputational risks. It further clarifies that outsourcing-related losses qualify as operational risk only when they directly impact the institution, distinguishing past transactional legal risks from future regulatory-driven business changes.
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Preliminary remark In its mandate the OpR Expert Group set itself the task of drawing up proposals for how the latitude that exists in the national implementation of the Basel and Brussels rules on operational risk might be utilised. The following Expert Group recommendation is a suggestion for the definition of operational risk. The recommendation is subject to its being consistent with the decisions taken at the European level.
03.11.2008
Section 269 of the Solvency Ordinance (as of 01.01.2007) Approaches to determining the capital requirement for operational risk Operational risk means the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. 2This definition shall include legal risk.
Explanatory comments Strategic risk and reputational risk are not part of operational risk. Legal risks within the meaning of the risk of losses as a result of infringements of legal provisions in force are part of operational risk. These include the risk of suffering losses on transactions concluded in the past because of a subsequent change in the legal situation (change in case-law or amendment of legislation). The risk of having to change future business activities because of changes in the legal situation is not to be regarded as operational risk. Operational risk comprises the risk of losses manifesting within the institution itself. Losses occurring within a service provider with whom an agreement regarding the outsourcing of activities has been concluded are not operational risk if the losses have no effect on the institution. Operational risks in this context are losses that arise in the institution as a result of the service provider failing to provide the service properly or failing to provide it at all. In this instance the legal risk of the outsourcing agreement itself also needs to be taken into account.
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